Consolidating your debt

Should you pay to have your debt administered?
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01.Misleading marketing


By using a debt consolidation business you could end up paying more in the long run than you would dealing directly with the creditors.

Debt consolidation businesses advertise themselves as a quick way to get the monkey off your back, but you could end up paying more in the long run than you would dealing directly with the creditors. Your credit rating might take a blow, too. Transparency and trust are the main issues at stake. 

CHOICE called a number of debt consolidation agencies to ask about fees, but we were told the information would only be made available after we'd surrendered a raft of personal details and, in effect, registered with the company and agreed on a plan.

Talking to a financial counsellor first is always a better idea than going through a debt consolidation business. A list of counsellors in your state is on the website of the Insolvency and Trustee Service Australia. You can also check the services listed on Financial Counselling Australia.

For more information about managing debt, see our Borrowing section.

Predators afoot

A certain breed of brokers and lenders preys on consumers desperate to keep their homes. The insidious practice of “equity stripping” has seen homeowners surrender up to 20% of the equity in their homes in fees for new loans before they understood they'd been had. Worse, interest can skyrocket to as much as 50% in the case of default. 

In some cases, the best strategy is to sell your home on your own terms and downsize your living arrangements rather than let your creditor sell it.

You can easily end up paying more than you borrowed, interest included.
- Saskia ten Dam, Financial counsellor

Saskia ten Dam, a long-serving financial counsellor at Townsville Legal Service, says most businesses that advertise themselves as debt consolidators are actually just debt agreement administrators operating under Part IX of the Bankruptcy Act – something you could negotiate with your creditors on your own. Unlike bona fide banks, they can't provide consolidation loans and charge interest, so resort to hefty fees.

“I've seen upfront fees of $2000 followed by $200 fortnightly or even weekly payments,” she says. 

“And the debtors often have no idea what they're going to end up paying over the long term. The payment period could be up to seven years or more – there's really no restriction, and there's no guarantee the creditor will be satisfied."

“A lot of these businesses tell you to stop paying your creditors while they put the deal together, but you can't get any information about what it's going to cost until you sign up, and you have to pay a big fee to do that. You can easily end up paying more than you borrowed, interest included."

Movement overseas

In the US, where debt is high and there's an endless supply of predatory financial practices, the Federal Trade Commission (FTC) recently shut down a “robo-caller” debt-collection operation that netted $13m by promising to dramatically reduce credit card interest rates for a $995 fee. The scam violated an October 2010 FTC ruling against telephone-based debt consolidation companies charging upfront before doing anything about the debt. (The scammers not only didn't help reduce the debt, they also on-sold the consumers' details to other businesses.) Upfront fees for debt consolidation are still common in Australia.



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